May 01, 2013

Is a Higher Borrowing Trajectory Warranted or Not?

Carmen Reinhart and Kenneth Rogoff (2013):

Austerity is not the only answer to a debt problem: To be clear, no one should be arguing to stabilise debt, much less bring it down, until growth is more solidly entrenched – if there remains a choice, that is. Faced with, at best, haphazard access to international capital markets and high borrowing costs, periphery countries in Europe face more limited alternatives. Nevertheless, given current debt levels, enhanced stimulus should only be taken selectively and with due caution. A higher borrowing trajectory is warranted, given weak demand and low interest rates, where governments can identify high-return infrastructure projects. Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis.

Comments

Is a Higher Borrowing Trajectory Warranted or Not?

Carmen Reinhart and Kenneth Rogoff (2013):

Austerity is not the only answer to a debt problem: To be clear, no one should be arguing to stabilise debt, much less bring it down, until growth is more solidly entrenched – if there remains a choice, that is. Faced with, at best, haphazard access to international capital markets and high borrowing costs, periphery countries in Europe face more limited alternatives. Nevertheless, given current debt levels, enhanced stimulus should only be taken selectively and with due caution. A higher borrowing trajectory is warranted, given weak demand and low interest rates, where governments can identify high-return infrastructure projects. Borrowing to finance productive infrastructure raises long-run potential growth, ultimately pulling debt ratios lower. We have argued this consistently since the outset of the crisis.